UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-21229
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STERICYCLE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3640402
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1419 LAKE COOK ROAD, SUITE 410, DEERFIELD, ILLINOIS 60015
(Address of principal executive offices)
(847) 945-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. [ x ] Yes [ ] No
As of October 31, 1997, there were 10,397,272 shares of the Registrant's
Common Stock outstanding.
STERICYCLE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of Stericycle, Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996........................1
Condensed Consolidated Statements of Operations
Three months ended September 30, 1997 and 1996
Nine months ended September 30, 1997 and 1996...................2
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1996...................3
Notes to Condensed Consolidated Financial Statements............4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................12
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
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(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 7,981 $11,950
Short-term investments 2,335 5,799
Accounts receivable, less allowance for doubtful
accounts of $236 in 1997 and $178 in 1996 10,698 4,756
Parts and supplies 469 360
Prepaid expenses 114 426
Other 613 490
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Total current assets 22,210 23,781
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Property, plant and equipment:
Land 90 90
Buildings and improvements 5,619 5,598
Machinery and equipment 11,185 10,702
Office equipment and furniture 686 463
Construction in progress 747 362
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18,327 17,215
Less accumulated depreciation (6,754) (5,208)
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Property, plant and equipment, net 11,573 12,007
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Other assets:
Goodwill, less accumulated amortization of $1,752
in 1997 and $807 in 1996 28,533 18,834
Other 743 533
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Total other assets 29,276 19,367
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Total assets $63,059 $55,155
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt $ 2,907 $ 3,215
Accounts payable 1,681 1,510
Accrued liabilities 7,573 3,769
Deferred revenue 551 670
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Total current liabilities 12,712 9,164
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Long-term debt:
Industrial development revenue bonds and other 1,591 1,986
Note payable 3,867 2,605
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Total long term debt 5,458 4,591
Other liabilities 1,228 1,386
Shareholders' Equity:
Common stock (par value $.01 per share, 30,000,000
shares authorized, 10,386,051 issued and
outstanding in 1997, 10,000,264 issued and
outstanding in 1996) 104 100
Additional paid-in capital 82,237 79,405
Accumulated deficit (38,680) (39,491)
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Total shareholders' equity 43,661 40,014
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Total liabilities and shareholders' equity $63,059 $55,155
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The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30,
---------- --------- ---------- ---------
1997 1996 1997 1996
---------- --------- ---------- ---------
Revenues $12,659 $6,313 $33,475 $17,930
Costs and expenses:
Cost of revenues 9,007 5,011 25,113 14,200
Selling, general & administrative 3,122 1,802 7,725 5,118
---------- --------- ---------- ---------
Total costs and expenses 12,129 6,813 32,838 19,318
---------- --------- ---------- ---------
Income (loss) from Operations 530 (500) 637 (1,388)
Other income (expense)
Interest income 131 116 528 116
Interest expense (121) (102) (336) (308)
---------- --------- ---------- ---------
Total other income (expense) 10 14 192 (192)
---------- --------- ---------- ---------
Income (loss) before income taxes 540 (486) 829 (1,580)
Income tax expense 11 0 18 0
---------- --------- ---------- ---------
Net income (loss) $529 ($486) $ 811 ($1,580)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income (loss) per common share $ 0.05 ($0.06) $0.08 ($0.21)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Weighted average number of
common shares outstanding
and equivalents 10,839,436 8,202,555 10,480,182 7,401,916
---------- --------- ---------- ---------
---------- --------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1997 1996
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(in thousands)
OPERATING ACTIVITIES:
Net income (loss) $ 811 $ (1,580)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,489 1,500
Change in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (4,315) (432)
Parts and supplies (109) 46
Prepaid expenses 246 132
Other assets 35 7
Accounts payable (546) (828)
Accrued liabilities 2,106 623
Deferred revenue (181) 47
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Net cash provided by (used in) operating activities 536 (485)
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INVESTING ACTIVITIES:
Payments for acquisitions and joint ventures, net of cash acquired (5,704) (1,068)
Proceeds from maturity of short-term investments 5,799 -
Purchases of short-term investments (2,335) -
Capital expenditures (1,124) (626)
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Net cash used in investing activities (3,364) (1,694)
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FINANCING ACTIVITIES:
Net payment of note payable to bank - (858)
Repayment of long term debt (936) (2,088)
Principal payments on capital lease obligations (246) (227)
Principal payments on notes receivable for common stock purchases 4 -
Proceeds from bridge loan - 1,000
Proceeds from issuance of common stock 37 28,479
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Net cash (used in) provided by financing activities (1,141) 26,306
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Net (decrease) increase in cash and cash equivalents (3,969) 24,127
Cash and cash equivalents at beginning of period 11,950 138
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Cash and cash equivalents at end of period 7,981 24,265
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Supplementary disclosure of cash flow information:
Acquisition of machinery and equipment financed with a capital lease $ - $ 364
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Issuance of common stock in payment of Safeway note $ - $ 1,488
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The accompanying notes are an integral part of these financial staements
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; but the Company believes that the
disclosures in the accompanying condensed consolidated financial statements
are adequate to make the information presented not misleading. In the opinion
of management, all adjustments necessary for a fair presentation for the
periods presented have been reflected and are of a normal recurring nature.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the three years ended December 31, 1996, as filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. The results
of operations for the nine-month period ended September 30, 1997 are not
necessarily indicative of the results that may be achieved for the entire
year ending December 31, 1997.
NOTE 2. NET INCOME (LOSS) PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute net income (loss) per common share, and to
restate all prior periods. Under the new requirements for calculating basic
net income (loss) per common share, the dilutive effect of stock options will
be excluded. The impact of Statement No. 128 on the calculation of primary
and fully diluted net income (loss) per common share for the nine-month
periods ended September 30, 1997 and 1996 is not expected to be material.
NOTE 3. ACQUISITIONS
In May 1997, the Company announced the acquisition of Environmental
Control Co., Inc. ("ECCO"), one of the leading medical waste companies in the
New York City market. The Company paid $4,200,000 in cash; issued 125,000
shares of stock, assumed debt on vehicles and issued a $2,300,000 10-year
promissory note for the balance of the purchase price. The ECCO purchase
price is subject to downward adjustments to reflect uncollectible acquired
accounts receivable, additional outstanding obligations not reflected in the
purchase price at closing, and the extent to which ECCO's revenues during the
one-year period following closing are less than a specified amount.
During the quarter ended June 30, 1997, adjustments were made to the
value of the vehicles purchased and the purchase price in connection with the
December 1996 acquisition of the major portion of the medical waste business
of Waste Management, Inc. ("WMI"). The purchase price was decreased by
$756,000 as specified in the agreement, and the goodwill and note payable
were adjusted accordingly. The Company finalized its estimate of the value of
vehicles purchased and reduced its March 31, 1997 estimate of $1,200,000 to
$899,000. The related note payable was adjusted accordingly.
In June 1997, the Company purchased the customer list and certain other
assets of WMI's regulated medical waste business in Wisconsin ("WMI-WI"). In
July 1997, the Company announced the purchase of the customer lists and
certain other assets of the regulated medical waste businesses of Regional
Carting, Inc. and Rumpke Container Service, Inc. in New Jersey and Ohio,
respectively. Combined annual revenues are estimated to be $2,300,000 for
these three companies. The purchase price for these three acquisitions was
comprised of a combination of cash, promissory notes and shares of common
stock of the Company.
These acquisition transactions were accounted for using the purchase
method of accounting. The results of operations of the acquired businesses
are included in the condensed consolidated statements of operations from the
dates of acquisition.
NOTE 4. STOCK OPTIONS
During the quarter ended September 30, 1997, options to purchase common
stock totaling 18,284 shares were granted to key employees. These options
will vest ratably over a five-year period and have an average exercise price
of approximately $8.28 per share. The grant of options was made under the
Company's 1997 Stock Option Plan, which authorized the grant of options for a
total of 1,500,000 shares of the Company's common stock. The 1997 Stock
Option Plan was approved by the Company's stockholders in April 1997.
NOTE 5. STOCK ISSUANCE
During the quarter ended September 30, 1997, options to purchase 17,432
shares of common stock were exercised at prices of $0.53-$1.99 per share, and
the Company issued 55,389 shares of common stock in connection with certain
acquisitions.
NOTE 6. INCOME TAXES
The Company has generated historical net operating losses for income tax
purposes. Any benefit resulting from these net operating losses has been
offset by a valuation allowance. As the Company generates future taxable
income, it expects to incur alternative minimum taxes and income taxes in
states where the Company has no offsetting net operating losses.
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company provides regulated medical waste collection, transportation,
treatment, disposal, reduction, reuse and recycling services to its
customers, together with related training and education programs and
consulting services. The Company also sells ancillary supplies and in
selected geographic service areas transports pharmaceuticals, photographic
chemicals, lead foil and amalgam for recycling.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues increased $6,346,000, or 100.5%, to $12,659,000
during the three months ended September 30, 1997 from $6,313,000 during the
comparable period in 1996 as the Company continued to implement its strategy
of focusing on sales to higher-margin alternate care generators while
simultaneously paring certain higher-revenue but lower-margin accounts with
core generators. This increase also reflects the inclusion of approximately
$6,300,000 in revenues from the Environmental Control Company, Inc. ("ECCO")
acquisition, which was completed in May 1997, the acquisition of the major
portion of the regulated medical waste business of Waste Management, Inc.
("WMI"), which was completed in December 1996, the acquisition of WMI's
regulated medical business in Wisconsin ("WMI-WI"), which was completed in
June 1997, and the acquisition of the regulated medical waste business of
Regional Carting, Inc. ("Regional") and Rumpke Container Service, Inc.
("Rumpke") in New Jersey and Ohio, respectively, which were completed in July
1997.
COST OF REVENUES. Cost of revenues increased $3,996,000, or 79.7%, to
$9,007,000 during the three months ended September 30, 1997 from $5,011,000
during the comparable period in 1996. The principal reason for the increase
was higher processing and transportation costs as a result of the ECCO, WMI,
WMI-WI, Regional and Rumpke acquisitions. Cost of revenues as a percentage of
revenues decreased to 71.2% during the three months ended September 30, 1997
from 79.4% during the comparable period in 1996 due to further integration of
the new acquisitions into the existing transportation infrastructure,
leveraging existing treatment capacity and general productivity improvements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $3,122,000 for the three months ended
September 30, 1997 as compared to $1,802,000 for the comparable period in
1996 due to the WMI and ECCO acquisitions and the continued strengthening of
the Company's sales and administrative organizations. Selling, general and
administrative expenses as a percentage of revenues decreased to 24.7% during
the three months ended September 30, 1997 from 28.5% during the comparable
period in 1996 primarily
due to the improved use of existing resources to support growth and
acquisitions.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to
$121,000 during the three months ended September 30, 1997 from $102,000
during the comparable period in 1996 primarily due to higher loan balances
outstanding. Interest income increased to $131,000 during the three months
ended September 30, 1997 primarily due to the investment of higher cash
balances versus the prior year.
INCOME TAX EXPENSE. The effective tax rate of 2.0% for the three months
ended September 30, 1997 reflects the utilization of the Company's net
operating losses for income tax purposes, offset by alternative minimum
taxes, and state income taxes in states where the company has no offsetting
net operating losses.
NET INCOME. Net income for the three months ended September 30, 1997
was a record $529,000, or $0.05 per share, compared to a net loss of $486,000
or ($0.06) per share during the comparable period in 1996. The increase in
sales and lower relative costs all contributed to the improved results.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES. Revenues increased $15,545,000, or 86.7%, to $33,475,000
during the nine months ended September 30, 1997 from $17,930,000 during the
comparable period in 1996 as the Company continued to focus on sales to
higher-margin alternate care generators. This increase also reflects
$15,060,000 of revenues from the inclusion of the WMI, ECCO, WMI-WI,
Regional and Rumpke acquisitions and two smaller acquisitions completed in
May 1996.
COST OF REVENUES. Cost of revenues increased $10,913,000, or 76.9%, to
$25,113,000 during the nine months ended September 30, 1997 from $14,200,000
during the comparable period in 1996. The principal reason for the increase
was higher processing and transportation costs as a result of the
acquisitions. Cost of revenues as a percentage of revenues decreased to 75.0%
during the nine months ended September 30, 1997 from 79.2% during the
comparable period in 1996 primarily due to the improved use of existing
resources to support growth and acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $7,725,000 for the nine months ended
September 30, 1997 as compared to $5,118,000 for the comparable period in
1996. Selling, general and administrative expenses as a percentage of
revenues decreased to 23.1% during the nine months ended September 30, 1997
from 28.5% during the comparable period in 1996 primarily due to the improved
use of existing resources to support acquisitions.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to
$336,000 during the nine months ended September 30, 1997 from $308,000 during
the comparable period in 1996. This increase was primarily attributable to
notes payable issued in connection with the WMI and ECCO acquisitions.
Interest income
increased to $528,000 during the nine months ended September 30, 1997 from
$116,000 during the comparable period in 1996, primarily due to the
investment of higher cash balances.
INCOME TAX EXPENSE. The effective tax rate of 2.2% for the nine months
ended September 30, 1997 reflects the utilization of the Company's net
operating losses for income tax purposes, offset by alternative minimum
taxes, and state income taxes in states where the Company has no offsetting
net operating losses.
NET INCOME. Net income for the nine months ended September 30, 1997 was
$811,000, or $0.08 per share, compared to a net loss of $1,580,000, or
($0.21) per share, during the comparable period in 1996. The increase in
sales and lower relative costs all contributed to the improved results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been financed principally through the sale of stock to
investors. Prior to the Company's initial public offering ("IPO"), purchasers
of stock invested more than $50,137,000 in capital which has been used to
fund research and development, acquisitions, capital expenditures, ongoing
operating losses and working capital requirements. The Company's IPO in
August 1996 raised $31,050,000, excluding offering costs, which has been used
primarily to fund acquisitions. The Company has also been able to secure
plant and equipment leasing or financing in connection with some of its
facilities. These debt facilities are secured by security interests in the
financed assets. In addition, the Company has available through December 31,
1997 a $2,500,000 revolving line of credit secured by accounts receivable and
a secured interest in all other assets of the Company. As of September 30,
1997 the revolving line of credit was not being used.
At September 30, 1997, the Company's working capital was $9,498,000
compared to working capital of $14,617,000 at December 31, 1996. The
reduction is primarily due to the use of cash balances to complete the
acquisitions of ECCO, WMI-WI, Regional and Rumpke and higher accrued
liabilities, partially offset by higher receivables.
Total assets increased to $63,059,000 at September 30, 1997 compared to
$55,155,000 at December 31, 1996. The increase of $7,904,000 was due
primarily to higher receivables and an increase in goodwill resulting from
acquisitions, partially offset by lower cash balances and short term
investments used to finance the various acquisitions.
Net cash PROVIDED by operating activities amounted to $536,000 during
the nine months ended September 30, 1997 compared to cash USED in operating
activities of $485,000 for the comparable period in 1996. The improvement in
cash flow provided by operating activities primarily reflects higher earnings
and depreciation and amortization partially offset by an increase in working
capital due to the integration of customers acquired in the WMI, ECCO and
other smaller acquisitions.
Capital expenditures were $1,124,000 for the nine months
ended September 30, 1997, compared to $626,000 for the same period in 1996.
The Company did not open any new treatment facilities during 1996 or 1997.
The Company may decide to build additional treatment facilities or to
increase capacity in its existing treatment facilities, which would require
additional capital expenditures. In addition, capital requirements for
transportation equipment will continue to increase as the Company grows. The
amount and level of these expenditures cannot currently be determined as they
will depend upon the nature and extent of the Company's growth and
acquisition opportunities. The Company currently believes that its cash, cash
equivalents and short-term investments and cash flow from operations will
fund its working capital and capital expenditure requirements through 1997.
Acquisitions and joint ventures, net of cash acquired, amounted to
$5,704,000 for the nine months ended September 30, 1997 compared to
$1,068,000 for the comparable period in 1996. The increase is primarily
attributable to the ECCO, WMI-WI, Regional and Rumpke acquisitions.
Net cash used in financing activities was $1,141,000 during the nine
months ended September 30, 1997. Net cash provided by financing activities
was $26,306,000 for the comparable period in 1996. In 1996, the Company
generated proceeds from the issuance of common stock in the amount of
$28,479,000 and a $1,000,000 bridge loan from certain shareholders, directors
and officers. In 1997, the Company paid off $936,000 of notes payable
primarily related to payoffs on vehicle financing assumed in the ECCO
acquisition.
FROM TIME TO TIME THE COMPANY ISSUES FORWARD-LOOKING STATEMENTS RELATING
TO SUCH THINGS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS,
ACQUISITION ACTIVITIES AND SIMILAR MATTERS.
A VARIETY OF FACTORS COULD CAUSE THE COMPANY'S ACTUAL RESULTS AND
EXPERIENCE TO DIFFER MATERIALLY FROM THE ANTICIPATED RESULTS OR OTHER
EXPECTATIONS EXPRESSED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE
RISKS AND UNCERTAINTIES THAT MAY AFFECT THE COMPANY'S BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATION INCLUDE: DIFFICULTIES AND DELAYS IN
COMPLETING AND INTEGRATING BUSINESS ACQUISITIONS; DELAYS AND DIVERSION OF
ATTENTION RELATING TO PERMITTING AND OTHER REGULATORY COMPLIANCE;
DIFFICULTIES AND DELAYS RELATING TO MARKETING AND SALES ACTIVITIES; AND
GENERAL UNCERTAINTIES ACCOMPANYING THE EXPANSION INTO NEW GEOGRAPHIC SERVICE
AREAS.
PART II -- OTHER INFORMATION
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed with this Report:
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter ended September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date:
November 14, 1997.
STERICYCLE, INC.
By /s/ Frank J.M. ten Brink
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Frank J.M. ten Brink
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)